Should you expect more from your property manager?

The field of property management, once the backwater of the real estate industry, has taken on a higher profile in recent years as the focus of the industry shifted from development and accumulation to management.

With the higher profile has come added responsibilities, such as tenant services, leasing, accounting and even asset management. The job of being a property manager has become more complex. Not only do clients come to the table with a longer list of requirements, but new laws and regulations make the job more difficult as well.

Denis Brauchle, senior vice president of property management at Greenwich, Conn.-based Bryant Development Corp. Inc., says the duties of a property manager have expanded over the past several years, meaning property managers have to provide a greater variety of services at lower costs to their clients. "They are no longer responsible only for a property's physical appearance and performance; they are also responsible for its consistent financial performance."

"Property management is more than collecting rent and handling tenant complaints," agrees Kathy P. Grubbs, senior vice president of property management at Harvey Lindsay Commercial Real Estate, Norfolk, Va. "It is maximizing the economic value of the property through increased revenues, decreased expenses and achieving the owners objectives through professional property management."

Andrew J. Czekaj, CEO of Cambridge Inc., Herndon, Va., says property management comprises the functions of providing services to tenants, maintaining properties, collecting revenues and disbursing expenditures as well as reporting monthly to owners which is comprehensive and accurate.

There are a number of reasons for the changing perception of property management, one of which is survival. Major developers saw the building and construction business all but disappear in the wake of the real estate recession of the late 1980s and early 1990s and sought other niche areas where their expertise could be valuable. As a result, a number of developers and some real estate investors, including insurance companies, began moving into the property management field, which not only provided long-term work but has been one of the few sectors in the industry consistently profitable.

However, Rick Kirk, COO and executive vice president of Houston-based PM Realty, says today's firms can not survive as strictly property management firms in the traditional sense of the term. "Today, they have to provide the leasing and construction services. In many cases, they have to have the ability to handle dispositions, to strategically develop plans and to enhance value for whatever the ownership strategy is. In reality, today's firms, in order to survive and to continue to expand, have to be able to demonstrate their ability to add value to the overall process of the real estate industry."

Tied in with the concept of corporate survival is the need to generate profits. For a long time, it was assumed the accumulation of real estate brought with it certain economies of scale which, in effect, became the raison d'etre of portfolio building. But aggregation did not bring the necessary economies that were expected, and instead, profitability needed to come from the better management of the properties already under wing, which meant more careful selection of, and reliance on, property managers.

Generating value

"For years and years, developers built and lenders lent and leasing agents leased and, when it was all said and done, they forgot who maintained and generated the real value of the property -- the property manager," says Jack Gallagher, president of the Institute of Real Estate Management in Chicago and senior vice president with Polinger Shannon & Luchs, a full-service real estate company in Chevy Chase, Md.

"The focus of property management is on the bottom line and operating costs are more critical than ever," says Randy D. Podolsky, president of Westchester, Ill.-based Podolsky and Associates.

As the focus of real estate turned to property management and asset management, the complexities of the business changed, and it has become more difficult for the small player to survive. "The cost to continually analyze management information systems is prohibitive for the small guy," says Gallagher. "It takes more than just knowing how to run a building, there is a technological side to it as well. As a result, you will see a lot of consolidation in the small- to mid-sized management companies."

In retail, for example, a number of companies, such as Simon Property, which were strictly developers and operators of shopping centers, have now gone into the third-party management business.

"They saw it was a way of keeping active when new construction plummeted," says Richard Echikson, chairman of Retail Consultants Inc. in Basking Ridge, N.J. "The market is getting better now, but don't forget retail went through three or four horrendous years where nobody was doing anything."

Echikson doesn't see the entry of former developers as a bad thing for the property management business. "They know their stuff. They are very retail-oriented and, since many often are managing their own centers, they can spread the costs."

Indeed, by boosting the level of competition, owners are now seeing more services for less dollars. "The development companies that now do property management already have big management staffs, so to add another property doesn't increase overhead. It is not a big addition to corporate expenses."

Despite the changes in the retail property management field, the focus of work at each shopping center hasn't changed. Owners expect property managers to exhibit expense control and a competitive focus and to keep up with maintenance. "The name of the game is market share," says Echikson. "Because the economy is not growing fast, you are stealing customers from someone else. It is a very competitive business."

In retail, Echikson adds, property managers should be chosen by reputation, whether they have managed similar properties, the type of retailers managed in the past (small stores, discounters, department stores, etc.) and whether there is an aggressive, well-trained leasing staff.

The property management needs of other real estate sectors are not much different from retail, although of course, the product is not the same.

Basically, property owners want their property to perform according to individual requirements and industry standards, says David Bickell, a Certified Commercial Investment Manager and president of RE/MAX Commercial Group in Indianapolis. "They want their property leased all of the time, rent collected in a timely fashion, competent and timely reporting of financial data, maintenance of property's appearance and happy tenants."

Retaining tenants

Keeping the tenants happy is another responsibility that has changed over the past years. "Tenants are demanding greater flexibility to accommodate the changes they've seen in their businesses," says Michael A. Steele, president of Equity Office Properties LLC in Chicago. "Mergers, acquisitions, downsizing and restructuring mean that tenants must have the ability to expand, contract or even discontinue their space needs."

In regards to managing existing tenants and retaining them over the long term, effective property management will make a significant difference in the net cash flow to ownership, thus, minimizing asset down time, says Czekaj of Cambridge Inc.

Bickell, whose company manages B-class and C-class industrial buildings, says in his part of the industry, property managers are off site, which means on-site visits become very important.

Suzanne Velin, vice president in charge of property management for Bickell, adds, one Of the key rules of property management is to communicate with tenants so they feel the landlord is interested and concerned about their business. "I recently spoke with a tenant in a building that we are going to be managing, and they were just enthusiastic about the fact they were seeing somebody in their office," Velin says. "They hadn't seen a representative of the owner for two years."

Aware of regulatory issues

It is not only competitiveness, communication and understanding new building technologies that make for good property management, but regulations governing the business are constantly evolving and property managers must be aware of the changes and be able to implement the consequences of statutory rulings.

Probably no sector of the industry has had to deal with more regulatory changes than the management of multifamily properties.

"There are so many issues that property managers need to be aware of these days; there is a whole area of expertise, a whole area of responsibility that must be considered," says Clarine Nardi Riddle, senior vice president of government affairs for the National Multi Housing Council in Washington, D.C. "Property managers must know about fair housing, maintaining security on premises, telecommunications, workman's compensation, compliance with Americans With Disability Act and all issues related to use of the bankruptcy process, which some tenants use to avoid being evicted."

To make matters more complicated, there are environmental, lead paint and building code issues. Disturbing multifamily management are new fair housing rules, which will impact how apartments advertise for residents and how residents are screened. Occupancy standards also might be changed. The traditional standard for how many people a unit houses has been two people per bedroom, but Housing and Urban Development has been pushing to have more people per unit.

According to Riddle, the issues to which a multifamily property manager must be cognizant include:

* fair housing and occupancy,

* security standards,

* telecommunication law factors,

* worker compensation,

* lead paint,

* EPA requirements and the disclosure of environmentally compromised real estate and

* handicap accessibility compliance.

The property management business has gotten tighter and more competitive, and in all likelihood, it will continue to do so. Customers are demanding more, and the quality of service must be higher. Owners assess potential property managers by their experience. Generally, they are looking for compatibility in terms of product managed and for professionals who have been in the business for a number of years and know how to handle the asset.

Understanding owners' goals

Successful property management firms, according to Brauchle of Bryant Development Corp., will be those that meet specific needs and objectives of their clients. "They must also have the ability to adapt to and overcome any challenges that the future may bring," says Brauchle. "Property managers today must be able to understand and implement an owner's short-term and long-range goals for each of their properties."

Grubbs of Harvey Lindsay agrees, "Our firm is finding that to be competitive we must provide more and more services to our clients, such as specialized reports, electronic transfer of information, sophisticated property management software, increased property visits, etc."

Michael Clevenger, who teaches the real estate and facilities management courses at the BOMI Institute in Arnold, Md., formulated a list of tips for choosing a property manager. He says owners should choose a property manager that:

* perceives the customer as the No. I reason for their existence,

* focuses on the customer,

* pays attention to detail,

* has good response time,

* makes visitations,

* is well rounded and well grounded,

* has a good technical background,

* has a good financial background,

* responds under pressure,

* has good people skills and

* knows how to stay within budget.

"Owners need to search for a property manager who displays integrity and is backed by proven results," says Podolsky. "The manager should have experience in the particular geographic area and product type. Choosing a firm with cutting edge technologies will allow the owner to stay in constant communication with the property manager, receiving reports that conform to his specifications."

Podolsky adds that the property manager should know the value of a tenant and be able to think like an owner. He recommends looking for a proven history of controlling or reducing operating costs.

As noted, the job of the property manager has become more complex, and in many instances, the property manager has to adjust to a variety of customer needs, some of which involve changes in the structure of the property, changes in ownership or introduction of new skill sets.

"Generally, the owner expects a full menu of services, and today's property manager or asset manager has to have expertise in a variety of issues, not only operational engineering, but they have to have an asset management mind-set," says Kirk of PM Realty. "The day of the traditional property manager largely has ended. You have to provide a much larger range of more sophisticated services than ever before."

San Francisco-based Grubb & Ellis has completed the purchase of IBM's 26$ interest in Pittsburgh, Pa.-based Axiom Real Estate Management, the facilities and property management firm the IBM and G&E began in 1992. Grubb & Ellis now owns 100% of the venture, which manages over 70 million sq. ft. in 350 properties around the country.

Axiom will continue to manage several million square feet for IBM in properties around the country under a contract that extends through the year 2000. Axiom sees the expanded relationship with G&E as an opportunity to help grow its facility management business.

A 1994 north Dallas acquisition, Sutton Place, was experiencing low economic occupancy (high '80s) and lower-than-market rental rates of approximately $0.71 per sq. ft. Many factors lead to this community's lack of performance, including a major road closure, which greatly reduced traffic and negative "first impression" issues such as lack of adequate signage, inferior interior and exterior amenities and poor exterior building conditions. Sutton Place's immediate market consisted of B-class communities, yet new construction of A-class communities were entering this market with rental rates in the $1.00 per sq. ft. range. Sutton Place was considered a C-class community in this market.

The marketing strategy for this community was to position this asset as a "B+," creating a niche between the already existing B-market and upcoming A-market. The location of this community was extremely desirable, and the market was strong. The road construction was completed and the rehab had begun. Sutton Place's exterior was repainted in bright colors resulting in better visibility from the newly completed highway. The clubroom and office were redesigned to establish a more credible first impression. The existing mailroom was renovated into an exercise facility, and a sundeck was constructed to create additional seating space around the only existing swimming pool. Interiors received upgrades to lighting, and outdated fixtures were replaced as well as several carpets and vinyl. Three models were installed in the highest density unit styles to utilize during the lease-up period.

One of the significant results of repositioning this asset was an increase in monthly rental from $0.71 per sq. ft. to its current rate of $0.84 per sq. ft. Sutton Place's economic occupancy also has increased from the low 80% range to its current status in the high 90% range.